Perdoceo Education: Riding The Online Wave

Summary

• Online education is becoming increasingly common as individuals seek to further their education remotely.
• Perdoceo, a recession resistant stock, is attractive in the face of prolonged economic declines.
• The share price is undervalued at $17.28 (vs. target price of $29.26).

In my previous article, I mentioned that I will cover more companies within the education industry. Today, we will take a look at Perdoceo Education Corporation (NASDAQ:PRDO), formerly known as Career Education Corporation. They provide online & on-campus post-secondary education services (Bachelor's, Associate, Master's & Doctoral) through two universities-Colorado Technical University (CTU) and American Intercontinental University (AIU). We are issuing a BUY recommendation with a target price of $29.26 based on the relative valuation methodology. This presents a 69.33% upside to the current price of $17.28. Our core thesis is that the company will ride on the trend towards online education with COVID-19 acting as a catalyst in the United States. The company's earnings present an undervaluation situation that we suggest investors to take advantage of.

Data: Perdoceo

Company Overview

The company has two main subsidiaries-Colorado Technical University (CTU) and American Intercontinental University (AIU) representing 54% and 46% of total revenues, respectively.

Data: Company Annual Report

Depending on the specific degrees, CTU and AIU offer 3 learning options for students to choose from: Online, Campus, Blended. The online option caters to students who may not have the opportunity to travel to campuses regularly. The campus option is needed for degrees such as Electronics Technology and Computer Science, which require students to attend practical lessons. The last approach combines the best of both worlds, allowing students to attend certain lessons remotely and practical lessons on campus. Both universities have two campuses each and an additional online headquarters in Arizona and Colorado.

Campus Locations; Data: Company Annual Report

AIU Houston; Source: AIU

CTU Colorado Springs; Source: The Chamber

As stated in the company's mission, the key difference between two universities is that AIU focuses on helping busy students get their degree as quickly and efficiently as possible. This can be seen by comparing estimated graduation dates between two identical degree programs from CTU and AIU. We can see that it takes approximately 4 years to obtain an Accounting degree from CTU and 3 years to obtain an Accounting degree in AIU. In both cases, we assumed that the student is studying full time and does not complete any fast-track exams.

CTU Estimated Graduation Date; Source: CTU

AIU Estimated Graduation Date; Source: AIU

On 2nd March 2020 the company acquired all of Trident University International's assets. Trident is an accredited university offering online degrees with a focus on graduate programs. The University will continue operating under AIU while preserving the Trident name. The cash consideration for this acquisition is around $44mm to $45mm and is expected to bring in ~$47mm of revenues and EBITDA of $9mm.

COVID-19 Impacts & Measures

As part of the measures to control the coronavirus outbreak, all of CTU's and AIU's campus-based classes have been shifted online. This was easy for the company as most majority of its lessons and students were already based online. The company has noted that the COVID-19 pandemic has had no material impact to their operating results thus far.

Recession Resistant

Education, being a defensive sector, is resistant to recessions. The share price of the company since its inception shows exactly how prices have reacted in past recessions. We can see that in the 00/01 crisis, prices were thriving. Once again, in the 08/09 crisis, prices had a general upward trend yet again.

Data: TradingView

Macro & Industry Trends

Majority of the macro & industry Trends were covered in my previous article. Make sure to check that out if you haven't already. In that article, we established that there is a growing trend of Americans having a post-secondary education. Historically, we saw education revenues rising when non-farm unemployment rates increase. In the graph below, we see CTU and AIU revenues rising when unemployment rates rose in 08/09. We expect this trend to continue in the future.

Data: Trading Economics, Company Financial Reports

In April and May 2020, we saw unemployment rates shooting up to 14.7% and 13.3% respectively, because of businesses shutting down as part of government-implemented measures to handle the coronavirus outbreak. We expect this to boost the company's revenue, especially if the recession drags on longer.

Data: Trading Economics

Financials

Looking at the company financials, we can see a general increase in revenues which appears to be cyclical, similar to the company Strategic Education (STRA) that we discussed in my previous article. Prior to FY17, the company implemented a restructuring plan where they divested some of their business. As such, revenues from the Others segment have declined over the quarters to a stable ~US$10k from their book sales. Overall, PBT and Net Income margins have been expanding over the years with a one-off dip in Q4 FY17 and Q2 FY19.

Data: Company Financial Reports, Author's Analysis

The revenue per enrollment has been very stable and forms the basis of our revenue projections. However, the revenue per enrollment for AIU seems to fluctuate slightly. We can attribute this to the modifications made to the course and degree offerings. Moving forward, we expect the amount payable by students for their degrees and courses to not deviate much.

Data: Author's Analysis

Next, we projected the enrollments for both universities based on historical growth. We assumed a conservative growth rate of 3.92% Q-o-Q for CTU's total enrollment, growing from 23,600 in FY19 to 24,525 in FY20 and 25,487 in FY21. The acquisition of Trident boosted AIU's enrollment growth in FY20Q1, which grew by 25.98%. We expect this growth to be the same for subsequent quarters in FY20 as well (keep in mind this growth is compared to the same quarter in the previous fiscal year).

Data: Company Financial Reports, Author's Analysis

With the above assumptions in place, we built our revenue model and extended the company's stable margins.

Data: Company Financial Reports, Author's Analysis

Our projections give us an FY20 EPS of $1.3 (vs $0.97 in FY19) and FY21 EPS of $1.31.

Data: Company Financial Reports, Author's Analysis

Looking at management's guidance for FY20 financials, we believe our projections to be on the conservative side with 17.1% lower EBIT and 14.3% lower diluted EPS.

Data: Company Quarterly Reports, Author's Analysis

Valuation

We opted to use a relative valuation methodology due to the lack of substantial data for online education companies. We constructed a blended approach with equal weightage of EV/EBIT and EV/Forward EBIT from public comps and historical EV/EBIT multiples for PRDO. We derived two target prices for investors with different risk appetites. A more risk-averse investor can look at $29.26 (70.5% upside) as a more conservative target price, while a less risk-averse investor could take profits at $43.81 (155.3% upside).

Source: Author's Analysis

The list of comps, recycled from the analysis of our previous article, can be found below. We tabulated forward ratios based on the current share price of the respective companies over the NTM values, removing any anomalies.

Data: Capital IQ

Bottom Line

The key investor takeaway is that we have a growing stock in the defensive sector that has been steadily increasing their revenues and earnings. Catalyst to our target prices would include future earnings reports over prolonged periods of recessions while investors flock to more defensive companies like Perdoceo Education.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in PRDO over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.